People-centered Credit Systems in Developing Countries:
This paper essentially argues for the need to establish regional networks of credit systems that are aimed at enhancing the quality and quantity of credit available for urban low-income groups in developing countries.
Availability and access to credit by low-income families have long been recognized as a major prerequisite for development. Besides the considerable externalities that credit generates through, for example, income-earning activities of the poor, it also helps in the improvement of their living conditions, particularly housing and infrastructure provision. Problems associated with access to loans from banks and other formal institutions, and the low-income/asset-holding position of the poor themselves are two factors that require a drastic revamping of the existing systems of credit delivery. Any such move also ought to take advantage of the vast networks of credit delivery that the poor themselves have established using their own resources.
Under such circumstances, a case for regional level networks is made - the network would link community credit groups with government agencies, NGOs and Banks so that shortcomings of the various actors can be overcome and resources shared.
Walking along the street of a settlement, one is struck by the apparent contrast of dwelling and habitat found on the same street. On one side is a dilapidated single storied house of tin sheets, open drains and no windows. Across the street is a fine two-storied brick and concrete house with glass windows and paneled doors and painted walls. There are many reasons for the existence of such differences even among the poor. One variable that repeatedly comes up as a sort of common denominator, and that is external to the resources of a household is credit, specifically adequate access to different sources of credit.
This article concentrates on the low-income households of urban areas in developing countries. The issues and ideas discussed here are based, in part, on primary surveys of 256 squatter households spread over six settlements, and 54 informal credit suppliers who served their financial needs. NGOs, social workers and academics were also interviewed to glean their opinion. The survey was conducted in Bangalore, India in June-July 1991.
Problems of Credit in Developing Countries
In attempting to obtain credit from banks, low-income households are constrained in their "credit worthiness" by factors such as low and/or irregular wages, jobs in the informal sector, seasonal employment, very low holdings of marketable assets etc. that have kept them out of the formal credit delivery network. This has led to dependence on informal credit markets to satisfy their credit needs (Srinivas, 1995). For example, for housing loans, it is imperative for a potential bank loan borrower to have tenure holding on the land on which the house is to be built, among other requirements. This summararily excludes all squatter households. In the survey, more than 95% of the finance used to build a house came from personal savings and borrowing from the informal market. There have been special programs targeting low-income households, but these have been few and far in between.
When Banks turn the Other Way
Stringent requirements of banks for loan appraisal have essentially kept people with low income and assets away from being serviced. They function under a set of regulations that are both self-imposed as well as required by the Central Bank of the country. These include capital, reserve and liquidity requirements, ceilings on lending and deposit rates, mandatory credit targets, and audit and reporting requirements (Ghate, 1988: 64-65). Such high requirements keep the poor out of formal credit sources. In the case of housing loans, for example, over reliance on credit history, preference of high cost properties, lifestyle assumptions, building style assumption, poor treatment of self- employed, high down payments etc. are some of the problems of the "mindset" of formal financial institutions (CDB-L, 1995). In general, the problems of access to formal credit are due to -
Due to these and other problems, 50 to 90 percent of the population of developing countries remain outside the services of formal credit institutions (UN-ESCAP, 1991: 4).
Need for a Change in Outlook
Thus, in the face of apparent failure of formal credit institutions to address the needs of low-income households, the key concern lies in using alternative approaches to mobilize credit. One important factor that has to be taken into consideration is that there is an existing system of informal credit delivery already operating in the settlements. Such systems need to be recognized, and concerted action taken that not only enhances such activities, but also provides necessary resources, training and support. Thus people's efforts in mobilizing credit should be seen as a logical complement to banking services. They fill a gap in the banks' delivery system and do not, as is popularly argued, duplicate or compete with banks.
Formulation, planning, implementation and management of a program or project should be done with active participation of all groups, taking each of their potentials and shortcomings into consideration. Nowhere is this more true than in the mobilization of financial resources within the settlement. Due to the extensive externalities that access to credit provides, credit is one of the main factors that can induce people to participate, for example, in improving their settlement, setting up a home-based enterprise, or providing for education.
The Quality and Quantity of credit for low-income groups
Before such action can be taken, it is necessary to understand the quality and quantity of credit used by low-income households. As mentioned above, in the absence of formal credit to satisfy their needs, they turn to their own resources and the informal credit market to satisfy their needs. In the survey of squatter settlements, the respondents had approached money lenders, pawn brokers, employers, rotating savings clubs, self- help groups, friends, relatives, neighbours etc. for their credit needs (in more than 98% of the cases). Analyzing the quality of credit used, the following three main points emerged (Srinivas, 1995):
Of the credit suppliers studied, the type that offered the greatest promise with respect to serving the needs and functions of the low-income households was the settlement-based community groups (also know as people's organizations or self-help associations). These were spontaneously formed and activated for mobilization of very small savings among its members, and sharing of these savings. Such groups offered democratic control of the proceedings because it was made up of the residents themselves; it was not profit motivated; it had multiple proprietorships; and it had close informational links among its members. In many cases, such self-help groups were initiated, supported and trained by a local NGO.
There were several features of their credit activity brought up in the survey. The credit mobilized by them was savings linked. Only if a member had saved a predetermined amount was a loan given. Members were interchangeable, that is, they were credit suppliers at one point of the process and demanders at another. The benefits of the credit operation were mutual to all members and equally distributed. Most groups used only internal funds to provide loans. Trust and social/cultural links were primary factors for evaluation of potential members. This ensured proper enforcement of loan terms and conditions, besides allowing for flexible operations. Thus the credit mobilized by such groups was timely, savings-linked and had flexible loan terms and conditions (Srinivas, 1995).
Factors that ensure the success of community groups include voluntary membership, democratic control, political, racial and religious neutrality, non-profit motives, fair distribution of resources and cooperative education (UNCHS, 1989: 2). Community-based initiatives in credit mobilization have to be facilitated and encouraged. There is a compelling need, however, for regional networking among community groups for mobilization of credit. Relevant government agencies, commercial banks, NGOs and other voluntary groups, academics and researchers need to be brought together at the regional level as a network to support, strengthen and enhance a community groups' local initiatives. Such a network binds these disparate groups together and generates more efficient and intensive interaction between the actors in the network.
The objectives of a regional network for credit could be:
Critical to the formation of a community group is strong leadership. A local community leader can influence and guide the collective efforts of the group members. Networks would help in identification and support of such individuals who show leadership qualities by sharing experiences and ideas from other network components. Core support from the network will provide the necessary inspiration for the development and training of leaders. The setting up of the groups' executive committee, drafting of its constitution, rules and regulations are similarly facilitated. When plans of action are drawn, information from other groups and agencies (for example integration into an existing governmental program or project) will help in ensuring its viability and sustainability.
Sharing of resources
Perhaps the key reason for setting up of a regional network lies in sharing of various resources, where the shortcomings of one actor are offset by the support and action of another. Information is a primary resource that can be shared by the network actors. Exchange of experiences and ideas; management skills; policies, programs and projects of the various actors (and their relative influence on other actions); problems and prospects of various approaches can be shared through the network. In the process of credit mobilization itself, there are vast possibilities for sharing of financial instruments such as mortgages, joint liabilities and guarantees, collective fund resources etc. Loan risks can also be shared between groups which will keep interest rates and administrative costs low.
Training of members
Considering the wide variety of activities involved in the mobilization of credit, the network can be used for training of members. Such training efforts can range from awareness building to development of skills necessary for credit management. Thus training efforts can take the form of visits to other community groups, sharing of newsletters, meetings, lectures, seminars and workshops, training programs etc. Non- formal modes of training such as drama, theater and songs are other ways in which awareness can be affected. Assisting a settlement in the dynamics of forming a community group can also be done through the network.
The network would facilitate links between the different actors. Intralinks between community groups themselves (for sharing of information, experience, resources), between groups and government agencies (facilitating program and project implementation, monitoring and evaluation), between groups and NGOs (training, information sharing, community group action), and between groups and banks (group liability and group loans) can take place.
The key advantage of operating at the regional level is that they enable a larger number of people to be reached. It also increases the intensity and outreach of the actors and their actions, overcoming individual and local shortcomings. This coming together of the peoples can, in fact, generate externalities of its own.
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